A paper presented by Mrs. Titilayo Fowokan Senior Tax Manager Akintola Williams Deloitte
} Describe the basic principles of deferred taxation } Identify the tax and accounting implications } Prepare deferred tax computations 2
} Introduction } Deferred tax definitions and key concepts } Deferred tax computation } Financial statement disclosure requirements 3
Deferred tax is: } about the interaction between tax law and accounting standards. } complex and prone to error. } performed by tax consultants or staff in Finance unit but needs dual skills. 4
} Tax equalisation in income statement. } Valuation tool in balance sheet. } Tax planning focus for company or group. } Proof of tax - effective rate reconciliation. 5
} Deferred tax:? Tax attributable to timing/temporary differences.? Estimated future tax consequences of transactions and events recognised in the financial statements of the current and previous periods. } Permanent differences:? Differences between taxable income and reported accounting income for a period originating in the current period and will not reverse in subsequent periods.? Differences between an entity s taxable profits and its results as stated in the financial statements => What can be the cause of this difference? 6
} Temporary differences:? Differences between an entity s taxable profits and its results as stated in the financial statements that arise from the inclusion of gains and losses in tax assessments in periods different from those in which they are recognised in financial statements.? Differences that originate in one period and are capable of reversal in one or more subsequent periods. } Accounting profit:? Net profit or loss for a period before deducting tax expense. } Taxable profit (Tax loss):? The profit (loss) for a period, determined in accordance with the rules established by the taxation authorities, based on which income taxes are payable (recoverable). 7
} Tax expense (Tax income):? The aggregate amount included in the determination of net profit or loss for the period in respect of current and deferred tax. } Current tax:? The amount of income taxes payable (recoverable) in respect of the taxable profit or loss for the period in respect of current tax an deferred tax. } Temporary/Timing differences:? Differences between the carrying amount of an asset or liability in the balance sheet and its tax base. Temporary differences can be either taxable temporary differences or deductible temporary differences. 8
} Deferred tax liabilities? are the amounts of income taxes payable in future periods in respect of taxable temporary differences. } Deferred tax assets? are the amounts of income taxes recoverable in future periods in respect of: deductible temporary differences, the carry-forward of unused tax losses, and the carry-forward of unused tax credits. 9
What could give rise to: } Deferred tax liability?? taxable temporary differences, which are temporary differences that will result in taxable amounts in determining taxable profit (tax loss) of future periods when the carrying amount of the asset or liability is recovered or settled (i.e. create a liability, reduce current tax, increase future tax). } Deferred tax asset?? deductible temporary differences, which are temporary differences that will result in amounts that are deductible in determining taxable profit (tax loss) of future periods when the carrying amount of the asset or liability is recovered or settled (i.e. create an asset, increase current tax, reduce future tax). 10
} Tax base of an asset or liability:? The amount attributed to that asset or liability for tax purposes. } Tax base example? A machine cost 100. For tax purposes, wear & tear of 40 has already been deducted in the current and prior periods and for accounting purposes depreciation of 10 has been deducted.? The tax base of the machine is 60 (i.e. 100 40) and the carrying amount/accounting NBV is 90 (i.e. 100-10). 11
} Computation using the liability or asset balance method:? Analyze cumulative differences between Net Book Value (NBV) and Tax Written Down Value (TWDV) of balance sheet items such as fixed assets, leased assets, etc.? Compute the deferred tax on above balance this is the deferred tax asset or liability.? Compare with prior year period figure to determine the movement/charge to the P&L. 12
} Example? An asset which cost 150 has a carrying amount of 100. Cumulative depreciation for tax purposes is 90 and the tax rate is 30%. } Solution Tax base (TWDV) =60 (i.e. 150 90) Carrying amount (NBV)=100 Temporary difference=40 (i.e. 100 60) Deferred tax liability=12 (40x30%) 13
} Example? An enterprise recognizes a liability of 100 for accrued product warranty costs. For tax purposes, the product warranty costs will not be deductible until the enterprise pays claims. The tax rate is 30%. } Solution Tax base= Nil Carrying amount=100 Deductible temporary difference =100 Deferred tax asset=30 (100 X 30%) 14
} Deferred tax liability? is recognized for all taxable temporary differences, except when those differences arise from: Goodwill for which amortization is not deductible for tax purposes; The initial recognition of an asset or liability in a transaction that is not a business combination, and At the time of the transaction affects neither accounting nor taxable profit. 15
} Deferred tax asset? is recognized for all deductible temporary differences to the extent that is probable that they are recoverable from future taxable profits.? A deferred tax asset is not recognized when it arises from: The initial recognition of an asset or liability in a transaction that is not a business combination, and At the time of the transaction affects neither accounting nor taxable profit. 16
} Accounting for Deferred Tax in the financial statements of any company is guided by International Accounting Standards 12 (IAS 12) and Statement of Accounting Standards 12 (SAS 12). } Other features of the standards are highlighted on the handout. 17
} Taxation balances presentation format? Shown separately from other assets and liabilities? Distinguish deferred tax balances from current tax balances.? Disclose deferred tax balances as non-current.? Taxation expense (income) should be shown on the face of income statement. 18
} Accounting policy? Method used for deferred tax should be disclosed. } Income statement and notes Total Income statement charge. Details of current and deferred tax expense. Prior yr adjustments. Effect of rate change. Details of deferred tax arising from current write-down or reversal of deferred tax asset. } Balance sheet and notes Income tax liability (tax accrual) Deferred tax liability/asset Analysis 19
} Effective tax rate checks reveal some tax and deferred tax errors 20
Bridgman Nigeria Limited: } The company has just changed its tax consultants and auditor in 2008 } Finance Director suspects tax error in 2007 financial statements? 2007 Financial statements provided;? Assume Lagos State fines and levy and legal and professional fees are disallowed;? Movement in stock and bad debts provisions are disallowed. 21
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